Commissioner of Taxation v Normandy Finance and Investments Asia Pty Ltd
[2016] FCAFC 180
•16 December 2016
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v Normandy Finance and Investments Asia Pty Ltd [2016] FCAFC 180
Appeal from: Normandy Finance Pty Ltd v Commissioner of Taxation [2015] FCA 1420
Pilmora Pty Ltd as Trustee of the Townsing Family Trust and Commissioner of Taxation [2015] AATA 976
File number(s): NSD 145 of 2016
NSD 146 of 2016
NSD 150 of 2016Judge(s): LOGAN, JAGOT AND DAVIES JJ Date of judgment: 16 December 2016 Catchwords: TAXATION – appeal from a single judge of the Federal Court of Australia – appeal from the Administrative Appeals Tribunal – where primary judge set aside various objection decisions of the appellant – whether finding of loans open - procedural fairness Legislation: Administrative Appeals Tribunal Act 1975 (Cth) s 44
Evidence Act 1995 (Cth) s 136
Federal Court Rules 2011 (Cth) rr 33.02 – 33.03
Income Tax Assessment Act 1936 (Cth) ss 175A, 190
Income Tax Assessment Act 1997 (Cth) s 6-5
Taxation Administration Act 1953 (Cth) ss 14ZU, 14ZZ, 14ZZK – 14ZZL, 14ZZO – 14ZZQ
Federal Court Practice Note TAX 1: Tax List, 1 August 2011
Taxation Practice Note (TAX-1), National Practice Area Practice Note, 25 October 2016
Cases cited: Accent Management Limited v Commissioner of Inland Revenue [2007] NZCA 230; (2007) 23 NZTC 21,323
Albion Hotel Pty Limited v Commissioner of Taxation [1965] HCA 4; (1965) 115 CLR 78
Allsene Pty Ltd v Commissioner of Taxation [1989] FCA 785; (1989) 89 ATC 5333
Anscor Pty Ltd v Clout (Trustee) [2004] FCAFC 71; (2004) 135 FCR 469
Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; (2001) 117 FCR 424
Cadwallader v Bajco Pty Ltd [2002] NSWCA 328
Cajkusic v Commissioner of Taxation [2006] FCAFC 164; (2006) 155 FCR 430
Commissioner of Taxation v Clarke (1927) 40 CLR 246
Commissioner of Taxation v Cooke (1980) 42 FLR 403; 10 ATR 696
Commissioner of Taxation v Dalco (1990) 168 CLR 614
Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32; (2008) 237 CLR 146
Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1
Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118
Gauci v Commissioner of Taxation (1975) 135 CLR 81
Gould v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490
Haritos v Commissioner of Taxation [2015] FCAFC 92; (2015) 233 FCR 315
Hitch v Stone (Inspector of Taxes) [2001] EWCA Civ 63; [2001] STC 214
HR Lancey Shipping Co Pty Ltd v Commissioner of Taxation (1951) 9 ATD 267; [1951] ALR 507
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Macmine Pty Ltd v Commissioner of Taxation (1979) 53 ALJR 362
McAndrew v Commissioner of Taxation (1956) 98 CLR 263
McCormack v Commissioner of Taxation (1979) 143 CLR 284
Millar v Commissioner of Taxation [2015] FCA 1104; (2015) 67 AAR 490
Millar v Commissioner of Taxation [2016] FCAFC 94; (2016) 2016 ATC 20-578
Normandy Finance Pty Ltd v Commissioner of Taxation [2015] FCA 1420
North Australian Aboriginal Justice Agency Ltd v Northern Territory [2015] HCA 41; (2015) 256 CLR 569
Pilmora Pty Ltd as Trustee of the Townsing Family Trust and Commissioner of Taxation (Taxation) [2015] AATA 976
Raftland Pty Ltd v Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516
Richard Walter Pty Ltd v Commissioner of Taxation [1996] FCA 454; (1996) 67 FCR 243
Robinson Helicopter Company Inc v McDermott [2016] HCA 22; (2016) 331 ALR 550; (2016) 90 ALJR 679
Snook v London & West Riding Investments Ltd [1967] 2 QB 786; [1967] 2 WLR 1020
Southwick v Moores Stephens Melbourne Pty Ltd [2008] VSCA 164
Suvaal v Cessnock City Council [2003] HCA 41; (2003) 200 ALR 1
Warren v Coombes (1979) 142 CLR 531
WR Carpenter Holdings Pty Ltd v Commissioner of Taxation [2006] FCA 1252; (2006) 234 ALR 451
WR Carpenter Holdings Pty Ltd v Commissioner of Taxation [2008] HCA 33; (2008) 237 CLR 198
Quote Investigator: Exploring the Origins of Quotations (Quote Investigator, 2012), viewed, 9 November 2016.
The Works of John Locke Esq: In Three Volumes, An Essay Concerning Human Understanding, [Essay originally published in 1690], The Epistle to the Reader, as printed for John Churchill, London 1714
Date of hearing: 15 to 17 August 2016 Registry: New South Wales Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 215 Counsel for the Appellant/Applicant: Mr D McGovern SC with Dr J Jaques Solicitor for the Appellant/Applicant: Australian Government Solicitor Counsel for the Respondents: Mr S Steward QC with Mr D McInerney and Mr J Hyde Page Solicitor for the Respondents: PriceWaterhouseCoopers ORDERS
NSD 145 of 2016 BETWEEN: COMMISSIONER OF TAXATION
Appellant
AND: NORMANDY FINANCE AND INVESTMENTS ASIA PTY LTD
First Respondent
ADVANT PTY LTD
Second Respondent
PILMORA PTY LTD AS TRUSTEE OF THE TOWNSING FAMILY TRUST (and another named in the Schedule)
Third Respondent
JUDGES:
LOGAN, JAGOT AND DAVIES JJ
DATE OF ORDER:
16 DECEMBER 2016
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.The orders of the primary judge of 17 December 2015 be set aside.
3.The parties confer and file within 14 days an agreed timetable for the making of further submissions in writing dealing with the issues of any order for remittal or not and costs, and give notice whether they wish any further oral hearing about those issues.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
NSD 146 of 2016 BETWEEN: COMMISSIONER OF TAXATION
Appellant
AND: NORMANDY FINANCE AND INVESTMENTS ASIA PTY LTD
First Respondent
ADVANT PTY LTD
Second Respondent
PILMORA PTY LTD AS TRUSTEE OF THE TOWNSING FAMILY TRUST (and another named in the Schedule)
Third Respondent
JUDGES:
LOGAN, JAGOT AND DAVIES JJ
DATE OF ORDER:
16 DECEMBER 2016
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.Orders 2, 3, 5, 6 and 7 of the primary judge of 17 December 2015 be set aside.
3.The parties confer and file within 14 days an agreed timetable for the making of further submissions in writing dealing with the issues of any order for remittal or not and costs, and give notice whether they wish any further oral hearing about those issues.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
NSD 150 of 2016 BETWEEN: COMMISSIONER OF TAXATION
Applicant
AND: GAYNOR TOWNSING
First Respondent
HENRY TOWNSING JNR
Second Respondent
EDWARD TOWNSING
Third Respondent
JUDGES:
LOGAN, JAGOT AND DAVIES JJ
DATE OF ORDER:
16 DECEMBER 2016
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.Orders 2, 3 and 4 of the Administrative Appeals Tribunal of 17 December 2015 be set aside.
3.The parties confer and file within 14 days an agreed timetable for the making of further submissions in writing dealing with the issues of any order for remittal or not, and give notice whether they wish any further oral hearing about those issues.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
LOGAN J:
In the preface, entitled “The Epistle to the Reader”, to his work, “An Essay Concerning Human Understanding”, first published in 1690, the great English philosopher, John Locke FRS, included the following apologia in respect of the length of that work:
I will not deny, but possibly it might be reduced to a narrower compass than it is, and that some parts of it might be contracted, the way it has been writ in, by catches, and many long intervals of interruption, being apt to cause some repetitions. But to confess the truth, I am now too lazy, or too busy to make it shorter.
(Quote taken from The Works of John Locke Esq: In Three Volumes, An Essay Concerning Human Understanding, [Essay originally published in 1690], The Epistle to the Reader, Page vii, as printed for John Churchill, London 1714. This edition is now freely available online via Google Books).
Others have voiced, or are popularly attributed to having voiced, similar sentiments to seek a reader’s understanding and forgiveness for prolixity in a communication: see Quote Investigator: Exploring the Origins of Quotations (Quote Investigator, 2012),
viewed, 9 November 2016.
The recollection of this apologia and an exploration of its origins were prompted by the length of the written submissions made by the parties to the learned primary judge (from the present appellant and applicant (the Commissioner of Taxation) alone, 348 pages in chief, supplemented by a further 18 pages of submissions) and, by the Commissioner, sought further to be made to his Honour, the prolixity of the Commissioner’s notices of appeal and further material (Mr Tavolaro’s affidavit of no less than 726 pages, inclusive of annexures) sought to be introduced by him for the purposes of these proceedings and the related burden which is thereby placed on any judicial officer.
To resolve these appeals, it is not necessary to investigate, much less to determine, whether the verbosity occurred for one or the other of the reasons given by Locke or for some other reason. But this case does provide an occasion to remind the profession that the concession in modern times of permitting oral submissions to be supplemented by written submissions was not intended to detract from an advocate’s duty to identify the true issues for determination and to make succinct submissions accordingly.
Details of the various taxation appeals and administrative reviews and the income years in question are given by the primary judge at [1] and [2] of his judgment. The primary judge also set out a dramatis personae comprehensively describing the persons, individual and corporate, involved in the background transactions and other events. I adopt the abbreviations used by his Honour for these persons.
The pertinent facts and related submissions have been summarised in the joint reasons for judgment of Jagot and Davies JJ (joint judgment), which I have had the advantage of reading in draft. Save to the extent necessary to explain my reasons for judgment, I do not repeat what is there summarised. Their Honours have, with respect and nicely, distilled from the prolix grounds of appeal the main issues which arise for determination.
Of these issues, the principal issue can be briefly stated. It is whether the learned primary judge was in error in concluding that the respondents had proved the various assessments to be excessive. In the circumstances of these proceedings, that very much becomes an issue as to whether it was open to the primary judge to conclude that the respondents had shown that a series of payments which the Commissioner had treated as income did not have this character, because they were indeed what they purported to be namely, loans. In turn, the answer to that depends on whether, in the circumstances, it was open to the primary judge to accept the evidence of Mr Henry George Townsing (Mr Townsing), the directing mind and will of the corporate parties to the transactions, that they were loans.
As to the outcome in respect of these issues, I respectfully differ from Jagot and Davies JJ. In my view, there is no basis for disturbing the conclusions reached by the primary judge. The various income tax assessments having not been shown to be excessive, the further conclusion below that penalties and general interest charge issues were, correspondingly, excessive, should be upheld.
There is a subsidiary issue as to whether the Commissioner was denied procedural fairness by the primary judge. I regard this as a confected issue, devoid of merit.
Further and in any event, in respect of NSD 145 of 2016 and NSD 146 of 2016 and as I understand is conceded by him, the Commissioner has, inadvertently, named Pilmora as the third respondent in these appeals. In these appeals, there is no assessment relevant to Pilmora, with the consequence that, as against Pilmora, the appeals must be dismissed, with costs.
It is tempting just to add that each of the Commissioner’s other appeals ought to be dismissed for the reasons given by the primary judge, so complete is my agreement with them. As it is, having regard to the length of the explanation which follows, some might well think that the adoption with respect to it of Mr Locke’s apologia would not have been out of place.
Given the principal issue and also the procedural fairness issue, it is desirable first to set out how the obligation to prove the assessments excessive arose and what it entailed in the circumstances of these proceedings.
The proceedings before the primary judge were conveniently heard together but were different in character. Each in this Court was a so-called “appeal” under s 14ZZ(1)(a)(ii) in Pt IVC of the Taxation Administration Act 1953 (Cth) (TAA) against an objection decision, really an exercise of the Court’s original jurisdiction. Each in the Administrative Appeals Tribunal (AAT) was an administrative review under s 14ZZ(1)(a)(i) of the TAA in respect of a separate but not unrelated objection decision, heard in his Honour’s separate capacity as a Deputy President of that Tribunal. The Commissioner has challenged both the outcomes on the taxation appeals as well as those on the reviews. These challenges necessarily involve, as to the former, an invocation of the Court’s appellate jurisdiction and, as to the latter, an invocation of the Court’s original jurisdiction by way of what is best termed a statutory appeal on a question of law under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act). The latter is not to be confused with an appeal by way of rehearing.
Common to both the taxation appeal and the administrative review proceedings challenged was the basal requirement that each applicant (respectively, the present respondents) prove the relevant assessment of the Commissioner to be excessive on a ground expressed in the related objection notice: s 14ZZO (taxation appeal) and s 14ZZK (administrative review) of the TAA respectively. As to this requirement, so much of the proceedings as concerned shortfall penalty or additional tax by way of penalty and the Commissioner’s decisions not to remit penalties or shortfall interest charges had a derivative quality in that, for all practical purposes, if the onus of proof in respect of the income tax assessments were discharged, it would necessarily follow that the respective applicants would succeed in respect of these other liabilities.
With respect to a taxation appeal, the obligation remains to prove the assessment excessive even though the present s 14ZZO characterises such an appeal as one against the Commissioner’s objection decision. That characterisation might, with respect, be the result of an uncritical, formal assimilation, not present in the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) as enacted (qv the former s 187), of the subject of a taxation appeal with the external, administrative review on the merits of the Commissioner’s decision on a taxation objection. Under the original scheme, where the constitutionally necessary (Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 at 153, [9]) option of an invocation of judicial power was availed of, the objection was treated as an appeal. That appeal was against the assessment and on a ground stated in the taxation objection. Then, as now, the assessment was a determination by an officer of the executive, the Commissioner, that a person was indebted to the Commonwealth in respect of an ascertained liability to tax on an ascertained taxable income. The purpose of that exercise of judicial power, as Isaacs ACJ stated in Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246 at 277, was “to correct the assessment and bring it, as an essential factum of liability, into conformity with the requirements of the law, so that whatever liability exists may be adjusted properly by a true factum”. It was the substantive amount of this liability that had to be proved to be excessive via the exercise of judicial power: McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 271. In contrast, the alternative under the former regime was the referral of the objection decision to a Board of Review which then, vested with all of the powers and discretions of the Commissioner and in place of him, in essence decided afresh the objection against the assessment. If the applicant on the review showed the assessment concerned to be excessive, it was then amended accordingly. In this regard, the AAT performs the same role as did the former Boards of Review.
The constitutionally necessary option of resort to an exercise of judicial power is still offered. Notwithstanding the present, formal characterisation of an appeal to the Court, the ultimate purpose of that exercise of judicial power remains the correction of the assessment. This is recognised by the continued requirement for an applicant to prove the assessment to be excessive, not to show that the objection decision is in error. The challenge remains one to the “substantive liability”, the assessed debt to the Commonwealth: WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198 at 204-205, [10]. On an appeal, the Court’s powers are broadly stated in s14ZZP of the TAA and can include varying the objection decision. But the end to which any such order, including any such variation, is directed is the correction of the assessment. By s 14ZZQ and after the time for any challenges to the order made in the exercise of original jurisdiction has expired, the Commissioner is charged with administratively implementing the Court’s orders by making such amendments of the assessment as are necessary. Like provision is made by s 14ZZL in respect of outcomes after administrative review by the AAT.
The obligation of proving the assessment to be excessive was once found in the now former s 190(b) of the ITAA 1936 but it has not changed as a result of its statutory relocation. As to what this obligation entails, there is no, and never has been, any relevant distinction to be drawn as between a taxation appeal and an administrative review proceeding. Later authority has approved observations made by Mason J with respect to the effect of that obligation in his Honour’s dissenting judgment in Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89:
Section 190(b) of the Act imposed on the appellants the burden of proving that the assessments were excessive. The appellants relied on their evidence and that of Graham [their land agent who acted for them] in order to show that the assessments were excessive. Once that evidence was rejected, the appellants’ case necessarily failed.
The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.
As to the later authorities which approve these observations, see McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284, esp at 302-304 (Gibbs J), 306 (Stephen J), 323 (Murphy J); Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 53 ALJR 362, esp at 371 (Stephen J), 381 (Murphy J); and Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614, esp at 624-625 (Brennan J with whom Dawson, Gaudron and McHugh JJ agreed, and Deane J generally agreed).
Relevantly, what the obligation to prove an assessment to be excessive entails in a case where, as here, the Commissioner’s income tax assessments have been predicated on particular transactions being a sham was definitively described by Hill J in Richard Walter Pty Ltd v Federal Commissioner of Taxation (1996) 67 FCR 243 (Richard Walter). In such a case, it is not for the Commissioner to prove what the true character of the transaction was. Rather, as part of showing that his taxable income and related tax liability is less than that assessed, it is for an applicant to show that the payment concerned was not income. In Richard Walter, as in the present case, each transaction impugned as a sham at least purported to be a loan. As to this, Hill J, having referred to authoritative, prior statements relating to the discharge of the onus of proof in a taxation appeal generally, observed (at 259):
These principles work out in the present case in the following way. The Commissioner alleges that the payments from Morlea to Richard Walter are income. In order to show that the assessment is excessive Richard Walter must thus show on the balance of probabilities that the payments are not income. It seeks to do that in the present case by making a case that the payments were loans. If this case is accepted, Richard Walter will … be entitled to succeed. In the present case it sought to show the amounts in question were loans through the evidence of Mr Holden who swore that they were and that the accounts reflecting them were correct. His Honour did not believe Mr Holden, finding that there was no intention that the loans would be repaid. This being the case, the payments in question were not loans. Whether they had some other character may have relevance to the question of sham, but that can for the moment be put to one side. It can not be correct to say that the onus lay upon the Commissioner to establish what the payments in question were. If they were not loans it will be for the taxpayer then to show that they are something else which does not have the character of income. If the taxpayer does not do this it will not have satisfied the onus of showing that the assessment is excessive.
In that same case, Lockhart J, at 246, made observations to like effect. The learned primary judge (at [65]) correctly approached the task of determining whether the assessments were excessive on the basis of the statements on that subject made by Hill J and Lockhart J in Richard Walter. Contrary to the Commissioner’s contention, he did not reverse the onus of proof. All that the primary judge did was to discharge his judicially independent or, in respect of the administrative reviews, administratively independent roles of determining whether the assessments in question had been proved by the respondents to be excessive, having regard to the grounds of objection and on the evidence before him. As it happened, his Honour’s conclusions differed from those of the Commissioner. That does not mean he reversed the onus of proof.
Strictly, there is only one pleading in a taxation appeal or, for that matter, in the alternative of an administrative review by the AAT. It is the taxation objection. Given what was put to us on behalf of the Commissioner, I rather think that, in relation to taxation appeals, the change in the formal characterisation already referred to has tended to obscure this in a way which did not occur under the former regime. That a taxpayer dissatisfied with an objection outcome could require the Commissioner to treat the objection as an appeal and forward it to the courts then vested with original jurisdiction in relation to taxation appeals (the High Court or a Supreme Court) meant that neither a taxpayer nor the Commissioner could be under any illusion as to the central importance in a taxation appeal of the objection and the grounds stated therein.
In an income tax matter, the means ordained by Parliament for the expression of dissatisfaction with an assessment is still by objecting against it, now in the manner set out in Pt IVC of the TAA: s 175A(1) of the ITAA 1936. Within Pt IVC of the TAA, s 14ZU provides, materially, that a taxation objection must state the grounds relied upon “fully and in detail”. As to this requirement, there is contemporary approval by the Full Court, found in Cajkusic v Federal Commissioner of Taxation (2006) 155 FCR 430 at 435, [17] (Cajkusic), of the following statement made by Williams J in HR Lancey Shipping Co Pty Ltd v Federal Commissioner of Taxation (1951) 9 ATD 267 at 273 (Lancey Shipping) in respect of the previous statutory provision for a taxation objection:
The grounds of objection need not be stated in legal form, they can be expressed in ordinary language, but they should be sufficiently explicit to direct the attention of the respondent to the particular respects in which the taxpayer contends that the assessment is erroneous and his reasons for this contention. In each case the sufficiency of the grounds is a matter for the Court. Vague grounds such as that the assessment is excessive are not, in my opinion, a compliance with the Act.
Provision for the furnishing by the Commissioner of what is termed an appeal statement is found not in the TAA but rather in the rules of Court: r 33.03 Federal Court Rules 2011 (Cth). In turn, both under the Court’s current “National Practice Area” Taxation Practice Note (TAX-1) and in its predecessor practice note, in force at the time when the taxation appeals in question were filed, there is provision for an applicant subsequently to file an appeal statement in response to that of the Commissioner. Neither the rules of Court nor a practice note can alter the statutory obligation which falls on an applicant to prove the assessment excessive by reference to a ground of objection. But they do not do this. Their purpose is to, and they do, complement that statutory obligation by identifying what are the real issues between the parties: WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2006) 234 ALR 451 at 459 per Lindgren J (later affirmed on both intermediate and final appeal). This is particularly important with respect to an applicant, because the Commissioner is (or at least ought to be) already made aware of the issues as seen by the applicant via the grounds of objection. The Commissioner’s appeal statement provides an understanding, which may not necessarily correspond with the reasons given for the objection decision, of the basis upon which the Commissioner proposes to meet the grounds of objection and whether and to what extent the applicant will be put to proof. That is why the rules provide for the Commissioner’s appeal statement to be filed and served first. The applicant’s appeal statement is responsive to this but not a substitute for the notice of objection.
As to a taxation appeal and given the focus of the TAA on the grounds specified in a taxation objection, it is essential that an applicant’s appeal statement identify issues not just by reference to any which the Commissioner chooses to raise but also by reference to those objection grounds, including by identifying which, if any, grounds are abandoned. Further, any amendment of an applicant’s appeal statement ought not to be made in isolation from a corresponding amendment of the taxation objection grounds. That requirement necessarily extends to any amendment thought by an applicant to be necessitated by an exchange with the docket judge, whether in pre-trial case management or in the course of the hearing of the taxation appeal. The Commissioner has a corresponding duty to ensure that a taxation appeal is conducted in conformity with the requirements specified by the TAA.
These observations apply mutatis mutandis in relation to an administrative review in the AAT, where statements of facts, issues and contentions are employed for like reasons to appeal statements.
A taxation appeal is initiated by the filing of a “notice of appeal against appealable objection decision” in Form 73: r 33.02(1) Federal Court Rules 2011 (Cth). That form provides, inter alios, for the specification of the “Grounds relied on”. In light of the provisions of the TAA referred to above, what ought to be inserted there is a reference to the grounds of objection, or at least to those which are pressed on the appeal to the Court. That is not what the respondents inserted. They put, “The Applicants on all the evidence and submissions lodged with the ATO during the course of the audit conducted by the Australian Taxation Office” [sic]: see Application (notice of appeal against appealable decision), filed 11 December 2013. Even accepting, as I do, that the word, “rely” has inadvertently been omitted from this formulation, it does not conform to the requirements of the TAA.
Each “application for review of decision” by which each administrative review proceeding was initiated in the AAT is also noteworthy for the absence of any reference to the grounds of objection. In the section of the application form in which the “reasons for application” are to be inserted, there is merely a detailing of the assessments concerned and an allegation that they are “excessive”: see Originating Application for review of decision on objection decision, filed 11 December 2013.
Given the requirements of the TAA and the complaint made by the Commissioner that the primary judge had, in effect, decided the proceedings below on a basis not put forward by the respondents, it is salutary to reproduce the material ground of objection, which was in common form in the various notices of objection, save for a reference to a particular putative lender, “The payment from [relevant putative lender] had the character of a loan and was not assessable income in the hands of the taxpayer.”
The general cast of the ground of objection will be noted. It is none the worse for that. It meets such need for specificity as Lancey Shipping, Cajkusic and s 14ZU of the TAA required. Much time, trouble and expense might have been saved if the generality of the ground of objection and its statutory role had been recalled by the Commissioner both in the original jurisdiction and on appeal.
The respondents’ appeal statements underwent a number of changes after the taxation appeals were instituted. The notice of objection did not. Included in the appeal book were their appeal statements dated 15 August 2014 and 1 September 2014 and those filed on 2 March 2015 (in VID 1336 of 2013 and also VID 1337 of 2013 – the respondents’ revised appeal statements). It is only necessary to refer to the latest of these, the respondents’ revised appeal statements.
The respondents’ revised appeal statements put the ground of challenge in respect of amounts included as assessable income in these ways:
(1)[Normandy Asia’s] case is that the deposits represented draw-downs on a loan facility between [Normandy Asia] and its parent company in Hong Kong. The parent company was [Normandy UK]: see revised appeal statement, VID1336 of 2013, para 3;
(2)[Normandy Asia] submits that the deposits to [Normandy Asia’s] bank account had the character of loan monies rather than ordinary income, and were not assessable to [Normandy Asia]. In particular, the agreement between [Normandy Asia] and [Normandy UK] was not a sham, but a loan: see revised appeal statement, VID1336 of 2013, para 29.
(3)Advant’s case is that the draw-downs had the character of loan money and were not assessable income of Advant: see revised appeal statement, VID1336 of 2013, para 46.
(4)The issues arising in connection with the net income of the Townsing Family Trust [of which Pilmora Pty Ltd was trustee] are as follows:
(a)Were the purported loans from the Townsing Family Trust from [Normandy Asia], [Normandy UK] and [Hua Wang Bank Berhad (HWBB)] a sham, with the consequence that the loan monies were income in the hands of the Townsing Family Trust?: see revised appeal statement, VID1337 of 2013, para 22(i).
Consistently with the common form objection ground, these statements are either perfectly general or the opening premise is general with respect to the character of the contested payments being asserted to be that of a loan. Where there is reference to an agreement, that is put on the basis of evidencing that character.
The primary judge found, and it is not challenged on appeal, that, at all material times:
(1)Mr Townsing was the directing mind and will, not only of Normandy Australia, Pilmora and Advant, but also of Normandy Asia;
(2)a Mr Vanda Gould was a longstanding and trusted taxation adviser to Mr Townsing and his related entities;
(3)Mr Gould was the directing mind and will of both HWBB and Normandy UK; and
(4)Mr Gould would not have acted contrary to Mr Townsing’s instructions or interests in relation to transactions Normandy UK or HWBB had with entities in Australia economically associated with Mr Townsing or members of his family.
Mr Townsing was called as a witness; Mr Gould was not. The primary judge proceeded (at [66]) on the basis, the correctness of which I do not gainsay, that the High Court had made it clear in Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516 at 538, [57] (Raftland) that it is the intention of the parties to the transaction or document, not their professional advisers, that is relevant to a finding of sham. His Honour gave judgment after Millar v Federal Commissioner of Taxation was decided in the original jurisdiction, Millar v Federal Commissioner of Taxation (2015) 67 AAR 490; [2015] FCA 1104, to which he refers (at [66]) in passing but prior to the delivery of judgment in the subsequent appeal to the Full Court in that case, Millar v Federal Commissioner of Taxation (2016) 2016 ATC 20-578. Because of his conclusion that the intention of both, or at least one, of the parties to the transactions impugned as shams could be determined on the basis of Mr Townsing’s evidence, his Honour found it “unnecessary to have recourse to some inference to be drawn as to the intention of a professional adviser who did not give evidence”. That being so, his Honour found it unnecessary to explore whether Millar in the original jurisdiction could be reconciled with Raftland.
Having regard to the unchallenged conclusions reached by the primary judge about Mr Townsing and Mr Gould and given the issues identified in the respondents’ grounds of objection and revised appeal statements, I likewise find it unnecessary to explore whether, with respect to sham, Millar in the appellate jurisdiction can be reconciled with Raftland. Further, given the conclusions of the primary judge about Mr Townsing and Mr Gould, there is, contrary to the Commissioner’s contention, no error derived from Jones v Dunkel (1959) 101 CLR 298 and the absence of Mr Gould from the witness box evident in his Honour’s reasons for judgment.
Mr Townsing’s was not the only oral evidence led at trial in relation to the impugned loans. The primary judge referred to and accepted evidence given by a Mrs Glover, a Mr Yunus and a Mr Ross, each of whom one might, without any intended disrespect, describe as transactional functionaries. Their evidence with respect to record keeping or contemporary conversations with him was consistent with or corroborated that given by Mr Townsing as to the character of the impugned loans. But it is patent from his reasons for judgment that it was the evidence of Mr Townsing which the primary judge regarded as decisive. In itself, that is unsurprising, given his pivotal role as the directing mind and will of transactional parties or the person whose interests were served by Mr Gould.
A sham is not an objective construct. So far as the rebutting of any question of sham was concerned, it was the subjective intention of the parties to the impugned loans which was relevant. The answering of this question was not left just to be inferred from established facts without the benefit of Mr Townsing’s evidence.
So far as the appeals are from taxation appeals decided in the original jurisdiction, that means that the present is not like Warren v Coombes (1979) 142 CLR 531 at 551, where an appellate court is in as good a position as the primary judge and may draw its own inferences. Rather, the conclusion of the primary judge as to the purported loans not being shams, which very substantially depended on his assessment of Mr Townsing’s credibility, must stand, unless it is shown that his Honour palpably misused the advantage which he enjoyed of observing Mr Townsing give evidence: Fox v Percy (2003) 214 CLR 118 at 127, [26]-[27], per Gleeson CJ and Gummow and Kirby JJ; Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at 436-438, [25]-[29] per Allsop J (Drummond and Mansfield JJ agreeing). This the Commissioner did not do. The resultant conclusions of the primary judge are neither contrary to “incontrovertible facts or uncontested testimony”, nor “compelling inferences”, nor “glaringly improbable”: Robinson Helicopter Co Inc v McDermott (2016) 90 ALJR 679 at 687, [43]. Instead, the Commissioner’s submissions, in my view, invited us in the exercise of appellate jurisdiction, to “sit, as it were, as a second trial court and consider, as if presented for the first time, the arguments advanced by counsel for the [appellant]”: Cadwallader v Bajco Pty Ltd [2002] NSWCA 328 at [118] per Heydon JA (Santow JA and Gzell J concurring). That is something we must not do.
The position is even starker in relation to the statutory, s 44 appeal from the AAT (NSD 150 of 2016). That is because, in my view, the findings of fact made by the primary judge, in his separate capacity as a Deputy President of the AAT, in the administrative review proceedings, fell within what was termed in Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315, at [201], the “zone of discretion”. Within this “zone”, it is nothing to the point that other, perhaps alternative, findings of fact might also have been open. Yet the Commissioner would have us make such findings in relation to the principal issue as it relates to the administrative review proceedings. To incorporate by reference in the s 44 appeal grounds of appeal in the notices of appeal in respect of the taxation appeals, most of which are directed to questions of factual controversy, is not to raise questions of law but rather to do violence to the different jurisdictional foundation of a s 44 appeal.
The administrative review proceedings related to assessments directed to three beneficiaries of the Townsing Family Trust (of which Pilmora was trustee). The conclusion reached on the administrative review was that payments treated by the Commissioner as income forming part of the net income of the trust were loans to Pilmora and thus not part of that net income. The three loans in question also feature in the taxation appeals. The primary judge, as he was entitled to do, incorporated by reference in the reasons of the AAT, reasons given in the taxation appeals as they related to these loans. But the different character of the s 44 appeal means that it does not follow that we are equally at liberty to depart from the respective results on the facts. In the s 44 appeal, there must be a question of law. The findings of fact made by the primary judge as to the payments being loans were reasonably open. There is no question of law entailed in the promotion of factual alternatives.
The primary judge did not accept Mr Townsing’s evidence uncritically. In the course of his oral evidence, which materially included his responses to questions put to him by the primary judge, Mr Townsing maintained that an instrument dated 7 May 2008 between Normandy Asia and Normandy Australia was intended to govern their future relationship as lender and borrower into the future. Materially, that instrument provided:
WHEREAS the Lender and the Borrower entered into an agreement on or about 1 July 1999 where by the Lender agreed to loan moneys to the Borrower. The initial amount loaned was A$20,000 in July 1999.
AND WHEREAS the amount outstanding and due for repayment by the Borrower to the Lender on 14 April 2008 was A$1,283,153.87 (“Loan”) as confirmed in the Borrower’s letter to the Lender dated 14 April 2008.
NOW IT IS HEREBY AGREED as follows:
1.The Lender, at the request of the Borrower agrees to enter into this Agreement to allow the Borrower to repay the total indebtedness, as provided in this Agreement.
2.Interest charged on the Loan shall be at the rate of seven per cent (7%) per annum. The interest rate may vary following a yearly review and in the Lender’s reasonable opinion as it deems fit. Interest payable on the Loan may be capitalised by mutual agreement of the Lender and the Borrower.
3.The Borrower agrees to provide security for the Loan in the form of a fixed and floating charge over its assets.
4.The whole of the said Loan shall become due and repayment immediately in any of the following events:
(a)If Borrower becomes bankrupt, insolvent or has failed to pay any amounts which have become payable to the Lender; and
(b)at any time on demand of the Lender after a period of three years from the date of this Agreement.
As to this, the primary judge observed, at [89]:
Notwithstanding the terms of cl 2 providing for the payment of interest (although from when, the agreement is silent), Mr Townsing’s evidence was that it was subsequently agreed between the parties, both of which he was the directing mind and will, that no interest would be charged (T 823/26–40). That does not make the provisions of cl 2 a sham: Raftland at [149] per Kirby J; see too, Hitch v Stone (Inspector of Taxes) [2001] STC 214 at 230, [68], and while the provisions of cl 3 seem to be devoid of factual content, this was not explored with Mr Townsing. But even if cll 2 and 3 were a pretence or a sham going forward because both Normandy Asia and Normandy Australia did not intend them to have effect according to their terms, that would not render the anterior payments by Normandy Asia to Normandy Australia over the years since 1999 anything other than loans to and borrowings by Normandy Australia if that was the common intent of both parties at the time the payments were made, which I find it was.
I see no error in this analysis. The payments in question had been occurring for some seven years by the time this instrument had at least purported to have been executed. The primary judge accepted the evidence of the directing mind and will of both the purported lender and the purported borrower that these payments were attended with a repayment obligation. That, for the reasons given by the primary judge (under the heading, “What is a loan?”: at [67] and following) meant that they were loans. Even if the later instrument were a sham, that could not alter the character of the payments already made at the time when they were made. Further, and I consider this to be a point made by the primary judge at [89] of his reasons, it was quite possible for the parties to the 7 May 2008 instrument to intend at the time of its execution that it take effect according to its terms and come later to abandon or not insist on compliance with particular terms. Yet further, having regard to the grounds of objection and the excerpts from the respondents’ revised appeal statements, quoted above, I do not accept that the present was ever a case where a failure to prove the 7 May 2008 instrument to be other than a sham was wholly determinative.
This was not a case where the characterisation as loans of the many payments by Normandy Asia to Normandy Australia which had occurred on and from 1999 wholly depended upon the instrument of 7 May 2008 being intended to take effect according to its terms. Further, unlike in Richard Walter, where evidence of the equivalent witness, Mr Holden, was not accepted by the trial judge in that case as reliable, in this case and on the subjects of whether these anterior payments were attended with a contemporaneous, intended obligation that they be repaid and of whether it was later agreed interest would not be charged, the primary judge accepted Mr Townsing’s evidence. It was no misuse of his advantage to accept that oral evidence while having the reservations he expressed in the passage quoted about the instrument of 7 May 2008. One did not necessarily contradict the other. Yet further, the primary judge’s postulate, “even if cll 2 and 3 were a pretence or a sham” is expressed only as an alternative and in the conditional tense at that. His Honour’s primary finding, for which there was supporting evidence from Mr Townsing, was just that the parties later agreed not to insist upon payment of interest. That does not mean that their antecedent agreement, a term of which was payment of interest, was a sham.
The reference (at [62]) by the primary judge to an observation made by the New Zealand Court of Appeal in Accent Management Limited v Commissioner of Inland Revenue [2007] NZCA 230 at [63] was apposite:
Whether these transactions are shams depends primarily on the states of minds of Dr Muir and Mr Bradbury as to their genuineness. Given that it is not to their advantage that the transactions be shams, it might be thought a little perverse to attribute to them states of mind which are inconsistent with their best interests.
It was likewise hardly in Mr Townsing’s best interests for these (or any of the other) anterior payments, later consistently recorded in the corporate accounts as amounts owed or, as the case may be owing, to be shams. Correspondingly, it likewise might have been more than a little perverse for the primary judge to attribute to Mr Townsing a state of mind inconsistent with his best interests. As it happened, so far as the impugned loans were concerned, the primary judge accepted Mr Townsing’s evidence “with little or no hesitation” (at [86], [104], [110] and [141]).
Materially, especially having regard to the general cast of the grounds of objection and on the whole of the evidence, the present case resembled (as the respondents submitted) at its heart, Albion Hotel Pty Ltd v Federal Commissioner of Taxation (1965) 115 CLR 78 at 88 (Windeyer J) in the sense that it was always pregnant with an issue, the “underlying transaction issue”, in this case as to whether the assessment might nonetheless be shown to be excessive even if one concluded that a particular written loan agreement was a sham, because the only reasonable conclusion, particularly if one otherwise accepted Mr Townsing’s evidence, was that the payments were in any event loans at the time when they were made.
The primary judge made particular reference at [89] to Hitch v Stone (Inspector of Taxes) [2001] STC 214 at 230, [68] (Hitch v Stone). Given the criticism made by the Commissioner of the conclusions his Honour reached, it is as well to set out not only the particular paragraph from the judgment of Arden LJ (with whom Kay LJ and Sir Martin Nouse agreed) to which he referred in the context of the other observations made by her Ladyship about transactions impugned as shams. I also rather think it likely that his Honour had all of these in mind when he came, later in his reasons for judgment, so tersely to dismiss particular considerations which the Commissioner had submitted told in favour of the payments being shams. In Hitch v Stone, Arden LJ stated:
65First, in the case of a document, the court is not restricted to examining the four corners of the document. It may examine external evidence. This will include the parties' explanations and circumstantial evidence, such as evidence of the subsequent conduct of the parties.
66Second, as the passage from Snook makes clear, the test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties.
67Third, the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship.
68Fourth, the fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding. The proper conclusion to draw may be that they agreed to vary their agreement and that they have become bound by the agreement as varied (see for example Garnac Grain Co Inc v HMF Faure and Fairclough Ltd [1966] 1 QB 650, 683–684 per Diplock LJ, which was cited by Mr Price.
69 Fifth, the intention must be a common intention: see Snook.
The reference to Snook by Arden LJ is a reference to the leading modern English authority on sham, Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802 per Diplock LJ. The five points made by her Ladyship in Hitch v Stone with respect to deciding whether an impugned transaction was a sham were likewise made by Kirby J in Raftland at [149], the other judgment expressly cited by the primary judge in the passage quoted above. There is no difference in understanding as between United Kingdom and Australian authority on this subject. In this case, the subsequent conduct of the parties included how the payments were treated in the accounts of each purported lender and borrower, a point highlighted by the primary judge (at [86], with reference to [84] and [85]) as telling in favour of his conclusion that the purported loans were not shams.
In the written submissions made to the primary judge, the Commissioner advanced (and pressed on appeal) a number of propositions as to why it ought to be concluded that the impugned transactions were not loans. These, plus his Honour’s response (at [91]), were as follows:
(1)Interest on the loan agreement could not be paid:
But it is common ground that the loans were interest free, and even when the instrument of 7 May 2008 came into existence, no interest was sought or was paid.
(2)The loan agreement (of 7 May 2008) was executed at a time when Normandy Australia was winding down its operations:
This is totally irrelevant to the payments made over the preceding six years; and, indeed, to subsequent payments.
(3)Interest was accrued in Normandy Australia’s accounts but not in Normandy Asia’s accounts:
Mr Townsing was the directing mind and will of both Normandy Australia and Normandy Asia and his undisputed evidence was that notwithstanding the provisions of cl 2 of the instrument dated 7 May 2007 [sic – 2008], he had decided that, consistently with what had occurred in earlier years, no interest would be paid.
(4)No real negotiations of the loan agreement:
One would not expect such “real negotiations” between a parent company and its wholly owned subsidiary, where both are under the directing mind and will of the same individual.
(5)No real negotiations for further drawdowns under the loan agreement:
The same reasons in (4) above are equally relevant.
(6)The parties never intended the loan to be repaid within three years as contemplated in the agreement:
No evidence.
(7)Money transfers continued even as Mr Townsing wound down Normandy Australia:
See (2) above.
(8)The use that Pilmora made of the funds is inconsistent with a third party funding business entities:
Irrelevant. Normandy Australia was the borrower.
(9)Pilmora had no ability at any time [to] repay the transfers from Normandy Asia:
Irrelevant. See (8) above.
(10)Descriptions in Normandy Australia’s accounts do not cause the transfers to be a loan:
So much may be accepted.
(11)Relationship between the parties: Mr Ross acted entirely on Mr Townsing’s instructions:
All the more reason why I found as I did: both Normandy Asia and Normandy Australia intended the payments to be by way of loan from the former to the latter.
(12)Mr Townsing’s offshore interests:
Irrelevant.
In my respectful opinion, each of the responses made by his Honour is legitimate and evinces no error of principle. These considerations would have had a role to play if the respondents’ task were to negate the existence of what in American jurisprudence is termed a “judicial sham” or of what in the United Kingdom is termed a “fiscal nullity”. But as the primary judge demonstrates, in what I consider to be a masterly comparative analysis (see ‘The Concept of ‘Sham’”, at [46] et seq), with the whole of which I respectfully agree, the concept of a sham in Australian, Canadian and United Kingdom law is very different from each of these. His Honour’s reference to the irrelevance of Mr Townsing’s offshore interests cannot be taken as a reference to the irrelevance of the existence of various foreign corporations and business interests controlled by Mr Townsing, for these are described at length by him. Rather, the existence of such interests is in no way probative that the purported loan transactions were shams.
That there was no written loan agreement executed in 1999 governing loans to be made was unremarkable. These were transactions within a closely and privately held and controlled corporate group. There was no need to document the character of the payments other than by later recording their status in the annual accounts of the entities concerned. Informality with respect to documentation is one thing; absence of consequence is another. Given this recording and in the event of a winding up of one or the other of the entities, it would have been difficult, if not impossible, for Mr Townsing credibly to deny to a liquidator or a court that the payments were anything other than loans. The primary judge accepted that the entries in the accounts did not cause the payments to be loans but those entries were a relevant circumstance and consistent with the oral evidence of Mr Townsing accepted by the primary judge. In a case where sham is alleged, inconsistency with surrounding circumstances can be a basis for rejecting the oral evidence of a party as to intention: Anscor Pty Ltd v Clout (Trustee) (2004) 135 FCR 469 at 497-499, [116]-[118] per Lindgren J, Wilcox and Moore JJ agreeing, but such a conclusion was not compelled in the present case.
In relation to Normandy Australia, the Commissioner also included in its assessable income for the year ended 31 December 2007, an amount of $2,220,000. The occasion for his doing this does appear, as the primary judge apprehended (at [93]), to be a note in the financial accounts of Normandy Australia for that year and a reference in a letter of 23 July 2007 from Normandy Asia to Normandy Australia (reproduced at [92] of the judgment below) to an agreement to loan this amount. However, the evidence before the primary judge (Ex 31, below) demonstrated that no payment giving rise to any repayment obligation was ever made, only “a granting of time to pay the purchase price of the Cyclopharm shares giving rise to an indebtedness from Normandy Australia to Normandy Asia equal to the purchase price” (at [93]). In terms of economic equivalence, there is merit in the Scots adage, “A penny saved is a penny earned” but in terms of the authorities as to what in law constitutes income under ordinary concepts, the primary judge’s consequential conclusion that a saving of expenditure did not constitute income was undoubtedly correct: Federal Commissioner of Taxation v Cooke and Sherden (1980) 42 FLR 403 at 416.
The present focus on the Normandy Asia/Normandy Australia transactions also offers a convenient opportunity to deal with the Commissioner’s denial of asserted procedural fairness. As I have already observed, I consider that this is a confected issue.
I have already highlighted the centrality of grounds of objection in the statutory charter for challenging assessments. In my view, they are not to be dismissed as without consequence. Given the generality of the material grounds of objection and that there were payments which preceded the instrument of 7 May 2008, there could not reasonably have been any misunderstanding by the Commissioner that there was more to these cases than an obligation to prove that that instrument was not a sham. Further, Mr Townsing’s evidence, if accepted, always admitted of the possibility that the instrument was not a sham but rather that there was a later lack of insistence on compliance with particular terms, especially relating to the payment of interest. I do not consider that the respondents’ revised appeal statements constituted an abandonment of the general proposition that the impugned transactions were indeed loans. The respondents’ task was to prove that the payments were loans at the time when they were made. Further, it was always possible for the 7 May 2008 instrument to have been intended to take effect at the time with compliance with some terms later either not insisted upon or abandoned. Yet further, that it might be possible, even at the time that agreement was made, for some terms but not the whole agreement to be a sham was well and truly open as a possibility to his Honour prior to the conclusion of Mr Townsing’s evidence. The Commissioner’s assertion of a denial of procedural fairness is, with respect, in truth a confession of a failure of analysis, which remained even after this flaw had, with consummate fairness, been highlighted by the primary judge prior to the conclusion of Mr Townsing’s evidence.
That highlighting and that there was always an “underlying transaction” also means, in my view, that the Commissioner’s reliance on Suvaal v Cessnock City Council (2003) 200 ALR 1 is misplaced.
The primary judge employed a similar pattern of reasoning in respect of the other impugned loans. This, too, proceeded from his Honour’s acceptance, “with little or no hesitation”, of Mr Townsing’s evidence, as well as his acceptance of the evidence given by Mrs Glover, Mr Yunus and Mr Ross.
In respect of Advant, it was controversial as to whether two amounts received in September 2001 from Normandy Asia and an amount received in March 2002 from Normandy UK were received by way of loan from Normandy Asia and Normandy UK respectively. The primary judge (at [104]) accepted the evidence of Mr Townsing, as the relevant directing mind and will, that the intention was that these amounts were to be repaid. That was a decisive acceptance in relation to their status as loans. The two payments by Normandy Asia to Advant in September 2001 preceded by some seven months an instrument dated 12 April 2002 between Normandy Asia as lender, Advant as borrower and Mr Townsing as guarantor. As to this, the primary judge observed (at [105]-[107]):
105.…Mr Townsing refused to accept that the relevant terms of the instrument to which he was taken in cross-examination by senior counsel for the Commissioner were pretences, but I do not accept his evidence in this regard. Clearly they were pretences, either because the payments from Normandy Asia to Advant had already occurred some seven months beforehand and the terms, insofar as they were conditions precedent to the making of loans thereunder, were “redundant”, or because the terms were not complied with and were never intended to be complied with.
106.In my view, the relevant terms were pretences or “window dressing” in the sense that they were intended to create the impression or disguise to a third party observer that the parties were dealing with each other on an arm’s length basis when in fact they were not. Such pretended terms did not, however, impugn the intention of the parties, manifested through Mr Townsing as the directing mind and will of both, that the payments from Normandy Asia to Advant at the time they were made in September 2001 were anything but loans to and borrowings by Advant from Normandy Asia. The terms and conditions on which those loans were made is not to be determined by reference to the terms and conditions of the instrument dated 12 April 2002, and while there is little evidence otherwise as to what those terms and conditions were, I accept that such payments by way of loan carried interest at the rate of 10% per annum.
107.The finding in [104] above that the two payments which Normandy Asia made to Advant in September 2001 were by way of loans is reinforced by the clear evidence that between May 2002 and August 2008 there were substantial payments made by Advant to Normandy Asia totalling over $304,000 in repayments of principal and payments of interest. The Commissioner did not contend that any of these payments from Advant to Normandy Asia did not occur, nor that they were not repayments of payments by Normandy Asia to Advant, but were something else.
As to the repayments referred to by the primary judge at [107] (and, on the respondents’ cases, other loan repayments), Mrs Glover had given evidence that these repayments occurred. Only the making of two of these was expressly challenged in her cross-examination. The primary judge was entitled to act on her evidence, the extent to which it was challenged and his assessment of her credibility when under cross-examination. As to the challenging of her evidence in relation to what at least purported to be loan repayments, it was not put to her, though the proposition was advanced by the Commissioner on appeal, that Advant’s financial records which recorded decreases in loan balances on funds transfers to Normandy Asia were not genuine, that funds transferred to Normandy Asia (which preceded payment of some of Mr Townsing’s legal fees) were not a repayment of Advant’s loan or that an amount offset against Mr Townsing’s director’s fees was not included in his assessable income. This exemplifies an impermissible approach adopted by the Commissioner in the appeals in seeking to contest the primary judge’s factual conclusions. It is not appropriate on appeal to invite the making of factual conclusions to the contrary of those made by a trial judge on the strength of propositions which ought to have been explored with a witness whose evidence was received at trial and whose evidence was accepted at trial as credible.
That evidence was given, and accepted, that repayments did occur supported, if not rendered unremarkable, the primary judge’s conclusions that preceding payments to the repaying entities were loans. It also highlights an inherent tension in the Commissioner’s complaint that the reasoning of the primary judge as, for example, [106] and [107] of his reasons for judgment, quoted above, disclose a denial of procedural fairness to him and the introduction of a new and determinative issue by his Honour not found in the respondents’ case below.
As already noted, the relevant ground of objection was that each of the impugned transactions was a loan. That the foundation for these was an oral agreement was, in respect of both the Normandy Asia/Normandy Australia and Normandy Asia/Pilmora impugned loans expressly raised by the respondents at trial in their opening. All that the primary judge did when he put the “underlying transaction” issue more generally and prior to the conclusion of Mr Townsing’s evidence was to highlight the potential of a conclusion in conformity with the ground of objection and a question which begged an answer if one accepted Mrs Glover’s evidence (or to the extent her evidence was not challenged). In respect of the Normandy Asia/Normandy Australia and Normandy Asia/Pilmora impugned loans, the Commissioner chose not to cross-examine Mr Townsing about his motivations for “disguising genuine non-arm’s length loans as being at arm’s length”, a subject upon which he has seized on appeal as a basis for an asserted denial of procedural fairness. In reality, this assertion also is but a confession of a failure of analysis prior to and at trial.
Further and contrary to the Commissioner’s contention on appeal, the primary judge did not deny the Commissioner any procedural fairness in declining to receive, after judgment had been reserved, a further 91 pages of submissions from the Commissioner in relation to Mrs Glover’s evidence and the question of repayments. He had already had ample opportunity at the trial to address this subject and, within the limits of his analysis of the grounds of objection, the respondents’ revised appeal statements, the course of the trial and the evidence given had made such submissions as he was advised.
Yet further and again contrary to the Commissioner’s contention, the primary judge’s conclusions involved no violation of the parole evidence rule in relation to a written loan agreement. If it was a sham, that rule had no operation: Raftland, at [33].
At trial, the Commissioner advanced (and pressed on appeal), after the primary judge had rejected, 20 propositions as to why the two September 2001 payments from Normandy Asia to Advant should not be found to be loans (reasons for judgment, at [108]). The observations made by me above in respect of those loans are equally applicable. Further, as the primary judge appreciated, many of these 20 propositions overlap with those advanced and rejected in respect of the Normandy Asia/Normandy Australia loans. I reproduce the 20 propositions and his Honour’s responses so as to indicate my concurrence with each of those responses:
(1)The loan agreement was executed after the transfers had occurred:
I agree this indicates that the transfers were not made pursuant to the terms of the instrument dated 12 April 2002, but this does not make the payments anything other than what both parties intended them to be, namely loans from Normandy Asia to Advant.
(2)No real negotiations of the loan agreement:
One would not expect such “real negotiations” between lending and borrowing companies under the directing mind and will of the same individual.
(3)No negotiations of transfers:
Not unexpected for the reason in (2) above.
(4)Normandy Asia directors’ resolution of 12 March 2002 inconsistent with what happened:
Not critical – by this time the payments had been made some seven months beforehand.
(5)The parties never intended significant clauses in the written loan agreement to govern the relationship between them:
So much may be accepted. Many of these clauses were mere “window dressing” and I agree that the parties never intended to be bound by them.
(6)The third mortgage over 26 Olive Street, East Malvern was also security under the Normandy Asia loan to Pilmora.
(7)The mortgage over 26 Olive Street, East Malvern could not be enforced against Mrs Townsing.
(8)There was never a mortgage over 26 Olive Street, East Malvern.
(9)26 Olive Street, East Malvern was sold in June/July 2002.
(10)No security was taken in replacement of the Olive Street property after it was sold.
(11)No fixed and floating charge ever taken over assets.
(12)No care taken to ensure adequate security was maintained under the loan facility:
The response made to (5) above is equally applicable to each of these reasons.
(13)Part X dividend payment not applied to loan balance:
Irrelevant.
(14)The use that Advant made of the funds is inconsistent with the third party funding business ventures:
Irrelevant.
(15)Advant had no ability to repay the transfers from Normandy Asia:
Irrelevant.
(16)Annual accounts do not cause the transfers to be a loan:
So much may be accepted.
(17)Relationship between the parties: Mr Ross acted entirely on Mr Townsings’ instructions:
All the more reason why I found as I did: both Normandy Asia and Advant intended the two payments to be by way of loan from the former to the latter.
(18)Mr Townsings’ offshore interests:
Irrelevant.
(19)After receiving a payment from Mr Townsing pursuant to his personal insolvency agreement, Normandy Asia permitted Mr Townsing to increase his borrowing:
It was not Mr Townsing’s borrowing; it was Advant’s borrowing. The references at paras 62 and 63 of the Commissioner’s written submissions behind Tab J to Normandy Asia permitting Normandy Australia to increase its loan facility are also irrelevant.
(20)Normandy Asia’s purported loan was used to defeat a genuine third party debtor:
Irrelevant.
A like conclusion necessarily follows, as it did for the primary judge, in respect of the payment made by Normandy UK to Advant on 15 March 2002, treated by the Commissioner as income rather than a loan. In respect of this, the Commissioner advanced at trial (and pressed on appeal) 21 propositions as to why it ought not to be accepted that the impugned transaction was a loan. Once again, I agree with each of his Honour’s responses and reproduce the relevant paragraph of his judgment (at [114]) so as to highlight the same:
(1)The loan agreement was executed after the transfer of $500,000 on 14 March 2002:
I agree this indicates that the transfer was not made pursuant to the terms of the instrument dated 15 March 2002, but this does not make the payment anything other than what both parties intended it to be, namely, a loan from Normandy UK to Advant.
(2)During the course of the audit, Advant maintained to the Commissioner that the loan agreement was signed on 15 March 2002:
Irrelevant.
(3) Mr and Mrs Townsing’s signatures were not witnessed:
Irrelevant.
(4)The parties never intended significant clauses in the written loan agreement to govern the relationship between them:
So much may be accepted. Many of these clauses were mere “window dressing” and I agree that the parties never intended to be bound by them.
(5) The mortgage over 6 Normandy Road was never registered.
(6)The mortgage over 6 Normandy Road was kept with the Townsings’ solicitors rather than by Normandy UK.
(7) No fixed and floating charge ever taken over assets.
(8)No care taken to ensure adequate security was maintained under the loan facility:
The response made to (4) above is equally applicable to each of these matters.
(9) Negotiating the loans agreement prior to 15 March 2002:
It was said that there was no documentary evidence of any negotiation in relation to the loan agreement prior to the initial transfer of $500,000 on 15 March 2002. I do not understand the use of the word “initial” because there was only ever one transfer. Having regard to the relationship between the parties, in particular Mr Townsing and Mr Gould, and the findings at [16] above, it is not at all surprising that there was no negotiations.
(10)Errors in the calculation of interest and repayments show a lack of care inconsistent with parties administering a binding agreement:
I have already found that the instrument of 15 March 2002 was not intended to govern the terms and conditions on which the loan from Normandy UK to Advant was made.
(11) Part X payment not applied to loan balance:
Irrelevant.
(12)The use that Advant made of the funds is inconsistent with the third party funding business ventures:
Irrelevant.
(13)The lack of repayments is inconsistent with a genuine loan intended by the parties to be repaid:
I do not agree. The Commissioner accepts that there was at least one repayment in excess of $100,000. If there had been further repayments over the period of the loan, this would strongly support a finding that the payment by Normandy UK to Advant on 15 March 2015 was by way of loan: as to the findings made in respect of the payments from Normandy Asia to Normandy Australia and Advant (see [85] and [107] above). But otherwise, the absence of further repayments is neutral as to the intention of the parties at the time the payment was made.
(14) Advant had no ability at any time to repay the transfers from Normandy UK:
Irrelevant.
(15) Annual accounts do not cause the transfers to be a loan:
So much may be accepted.
(16)Relationship between the parties: Susan Beach acted entirely on Mr Gould’s instructions and Gould is Townsing’s business associate. Available inference: that Mr Gould was acting in Mr Townsing’s interests:
I agree: see the findings at [15] and [16] above. All the more reason why I found as I did: both Normandy UK and Advant intended the two payments to be by way of loan from the former to the latter.
(17) Normandy UK’s accounts do not show a loan:
This is a reference to the working capital accounts filed with the UK Companies House and not in Normandy UK’s full financial statements. The working capital accounts are confined to current assets and current liabilities; the receivable due by Advant was anything but a current asset.
(18) Mr Townsings’ offshore interests:
Irrelevant.
(19)Normandy UK foreshadowed legal action to recover its loan but did (not) then seek to recover its loan:
This exemplifies the earlier findings at [15] and [16] above that while Mr Gould may have been the directing mind and will of Normandy UK and Mr Townsing the directing mind and will of Avant [sic], their dealings with each other were conducted otherwise than on an arm’s length basis.
(20)After foreshadowing that it would seek to recover the loan and not doing so, Normandy UK increased the facility:
Irrelevant.
(21)Normandy Asia’s purported loan was used to defeat a genuine third party debtor:
Irrelevant.
For completeness, I should add that I reject the Commissioner’s contention that the primary judge delivered inadequate reasons. I respectfully consider his Honour’s reasons for judgment both comprehensive and commendably succinct, especially given the plethora of issues and related submissions with which he was confronted.
Be they in the appellate or the original jurisdictions, the Commissioner’s appeals should be dismissed, with costs.
I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan. Associate:
Dated: 16 December 2016
REASONS FOR JUDGMENT
JAGOT AND DAVIES JJ:
Introduction
This matter involves notices of appeal extending over 17 pages each of which raise 21 grounds of appeal, written submissions in chief from the appellant of 30 pages, as well as 15 pages in reply (three times the standard length for each), and the tender of a document of 91 pages styled “Submissions of the respondent in reply to applicants’ submissions of 20 July 2015”. The last of these is the further submissions which the appellant, the Commissioner of Taxation (the Commissioner), contends would have been made, replying to the reply of the applicants below (and the respondents to the appeal, referred to collectively in these reasons for judgment as the taxpayers), had the primary judge permitted the Commissioner to do so.
The taxpayers succeeded before the primary judge in having various objection decisions of the Commissioner set aside because the primary judge found that moneys received by the taxpayers were loans to the taxpayers, and thus not assessable income. If his Honour erred, then his consequential orders setting aside certain objection decisions of the Commissioner cannot stand. The Commissioner contends that the primary judge erred in a multiplicity of ways but, despite the welter of paper generated and a hearing which extended over three days, the appeals give rise to a limited number of issues which warrant the attention of this Court.
The first issue is whether the primary judge, in holding that purported loans were genuine and not shams, found for the taxpayers on a basis that was not open to the primary judge. This is referred to as the underlying transactions issue below. In short, the issue is whether it was open to the primary judge to hold that written loan agreements were shams “in the sense that [the terms] were intended to create the impression or disguise to a third party observer that the parties were dealing with each other on an arm’s length basis when in fact they were not”, but that the “underlying” loan transactions were not shams.
The second issue is to identify the consequences if the primary judge did err in this way, in particular whether the proper result is that the applications below challenging the Commissioner’s objection decisions ought to be dismissed or whether the matters ought to be remitted for determination in accordance with the conclusions of this Court. This is referred to as the consequential orders issue below.
The third issue relates to the advances said to be made under the only loan agreement which the taxpayers contended had been made other than by a written agreement (from Normandy Asia to Normandy Australia, entities identified below), and is whether the primary judge erred in concluding that such a loan agreement existed. This issue may be conveniently addressed with the sale of shares from Normandy Asia to Normandy Australia, referred to as the fourth issue.
The fifth issue is whether the primary judge denied the Commissioner procedural fairness in relation to certain further submissions the taxpayers filed in respect of alleged repayment of the advances said to be loans. This is referred to as the repayments issue, and is the source of the 91 page reply to a reply referred to above.
The Commissioner’s allegations of error by the primary judge must be assessed in the context of the hearing before his Honour and the reasons he gave in support of his conclusions.
Facts and circumstances relevant to the first (the underlying transactions) and second (consequential orders) issues
Most of the primary facts were (and are) not in dispute.
Three companies were said to be borrowers – Pilmora Pty Ltd as Trustee for the Townsing Family Trust (Pilmora), Advant Pty Ltd (Advant), and Normandy Finance and Investments Asia Pty Ltd (Normandy Australia or NFIAPL). Mr Townsing was the directing mind and will of each of these companies, the taxpayers.
Three off-shore companies were said to be lenders. Normandy Finance and Investments Asia Ltd (Normandy Asia or NFIAL), Normandy Finance and Investments Limited (Normandy UK or NFIL) and Hua Wang Bank Berhad (HWBB). Each of these companies is owned by a company controlled by Vanda Gould.
The companies said to be lenders transferred funds at various times and in various amounts to the taxpayers.
The Commissioner assessed the taxpayers on the basis that the loans were shams and the amounts were ordinary income of the taxpayers and assessable under s 6-5 of the Income Tax Assessment Act 1997 (Cth) (the ITAA97).
The taxpayers lodged objections to the assessments. The basis of the objections was that the amounts assessed by the Commissioner were loan funds and not ordinary income in the hands of the taxpayers.
The objections were disallowed and the taxpayers appealed. They also applied to the Administrative Appeals Tribunal (the Tribunal) for review, insofar as presently relevant, of assessments of penalties and interest based on the assessments. The appeals to this Court and to the Tribunal were both heard by the primary judge, the latter in his capacity as a presidential member of the Tribunal.
The appeal statements filed by the parties put into issue whether the loan agreements under which the loan funds were claimed by the taxpayers to have been advanced to them were shams. The loans were said to have been advanced:
(1)to Advant pursuant to two loan agreements, one with Normandy Asia and the other with Normandy UK;
(2)to Normandy Australia pursuant to an oral loan agreement with Normandy Asia; and
(3)to Pilmora pursuant to three loan agreements, one with HWBB, one with Normandy Asia and the other with Normanby UK.
In its revised appeal statement, Advant contended that both loan agreements were documented and each loan agreement executed (para 44) and that neither loan agreement was a sham because, amongst other things, “none of the signatories to the loan agreements intended them to do anything other create an obligation for the advance of funds along with a corresponding obligation of repayment” (para 67). Advant also contended, in the alternative, that even if the loan agreements were shams, the monies advanced to it did not have the character of income and were not assessable because the monies were not derived by Advant beneficially, or received by it in connection with any income earning activity, or the monies were received by it on capital account (para 68).
In its revised appeal statement, Normandy Australia contended that the fund transfers to it were and “had the character of” loan monies under an agreement “which was not a sham” (para 29, 30) or, in the alternative, the amounts paid to it “had the character of a capitalisation of [Normandy Australia], a gift, or non-assessable receipts” (para 31).
In its revised appeal statement, Pilmora contended that it had received money from the three entities “in a context where a written loan agreement was executed between Pilmora and each of the three entities” (para 7). Further, that the three loan agreements were executed in 2002 between Pilmora and HWBB, in March 2002 between Pilmora and Normandy UK, and in April 2002 between Pilmora and Normandy Asia, and that the parties as relevant “intended to give [each] agreement legal effect” (paras 14, 15 and 16). Pilmora also contended that these loan agreements were not shams because, amongst other things, the loan agreements were documented and executed by or on behalf of the lender and borrower, none of the signatories intended the documents to do other than create an obligation for the payment of funds and repayment, and there was “no common intention that any of the three arrangements be something other than what it purported to be” (para 25). Alternatively, it was contended that if any one or more of the loan agreements was a sham then Pilmora did not receive the money beneficially or did not receive the money in connection with any income earning activity or received the money on capital account (para 26).
The primary judge heard the appeals and the application to the Tribunal together on 1–5 June, 10–12 June, 15–19 June, 24 June, and 8–9 July 2015. He delivered judgment on 17 December 2015 (see Normandy Finance Pty Ltd v Commissioner of Taxation [2015] FCA 1420), as well as reasons for decision in the Tribunal on the same day (Pilmora Pty Ltd as Trustee of the Townsing Family Trust and Commissioner of Taxation (Taxation) [2015] AATA 976).
It seems to us that all that is left is the evidence on which the taxpayers relied to support the conclusion that they had “repaid” some of the moneys advanced. There is a separate procedural fairness complaint about the repayments issue but, for present purposes, what is relevant is whether the evidence, such as it was, was capable, in and of itself, of making open a finding that the advances were by way of loan. The problem, as we see it, is that without a legal context in which moneys were being advanced subject to an obligation of repayment, the mere movement of money is a neutral fact. It says nothing about the legal character of the movement. This concern is not answered by the proposition, which we accept, that a contract for a loan might arise from conduct. As Allsop J (as he was) put it in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; (2001) 117 FCR 424 at [369]:
The contract arose from the prior conduct and communications of the parties, in particular around mid December. Mr Campbell QC called this a “springing contract” and something not known to the law. On the contrary, a number of authorities discuss the need not to constrict one's thinking in the formation of contract to mechanical notions of offer and acceptance. Contracts often, and perhaps generally do, arise in that way. They can also arise when business people speak and act and order their affairs in a way without necessarily stopping for the formalities of dotting “I”s and crossing “t”s or where they think they have done so. Here, the “i”s were not dotted and the “t”s were not crossed because of Mr Graham's conduct. Sometimes this failure occurs because, having discussed the commercial essentials and having put in place necessary structural matters, the parties go about their commercial business on the clear basis of some manifested mutual assent, without ensuring the exhaustive completeness of documentation. In such circumstances, even in the absence of clear offer and acceptance, and even without being able (as one can here) to identify precisely when a contract arose, if it can be stated with confidence that by a certain point the parties mutually assented to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, the court will recognise the existence of a contract. Sometimes this is said to be a process of inference or implication. For my part, I would see it as the inferring of a real intention expressed through, or to be found in, a body of conduct, including, sometimes, communications, even if it be the case that the parties did not consciously advert to, or discuss, some aspect of the relationship and say: ‘and we hereby agree to be bound’ in this or that respect. The essential question in such cases is whether the parties’ conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract. The authority for the above can be found in, at least, the following: Meates v A-G [1983] NZLR 308, 377 per Cooke J (as his Lordship then was); Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR [97,326] at 11,117-118 per McHugh JA (Hope and Mahoney JJA concurring); Vroon BV v Fosters Brewing Group [1994] 2 VR 32, 81-83 per Ormiston J (as his Honour then was); Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523,555 per McHugh JA (with whom Samuels JA concurred); Pagnan SpA v Feed Products [1987] 2 Lloyd’s Rep 601, 611 per Bingham J (as his Lordship then was) affirmed on appeal at p615; Pobjie Agencies v Vinidex Tubemakers [2000] NSWCA 105 [22-24] per Mason P (with whom Meagher and Handley JJA concurred); Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61 at [74] to [80] per Heydon JA; though see Toyota Motor Corp Australia Ltd v Ken Morgan [1994] 2 VR 106, 178 per Tadgell J (as his Honour then was); and in this context see also Electrical Enterprises Retail Pty Ltd v Rodgers (1989) 5 NSWLR 473, 489 per Kearney J and Manzi v Smith (1975) 132 CLR 671, 674.
True, but that was not the case the taxpayers ran. Mr Townsing did not say that there was a loan agreement arising by way of conduct. He said that there were written loan agreements and the parties acted consistently with and in pursuit of the written loan agreements. The distinction is critical. Conduct, insofar as the taxpayers relied upon it, was conduct said to demonstrate that the written loan agreements were genuine. But it was the written loan agreements which were said to give rise to the legal relationship, not the conduct. The only true alternative case that the taxpayers put was that set out in their appeal statements (that the moneys were not received beneficially, were not connected to income earning activity or were received on capital account).
Given this, the movements of money between the taxpayers and lenders said to amount to repayments of loans could not amount to anything more than evidence of the movement of money. The movements could not be said to be part of a course of conduct by which it should be inferred that the taxpayer borrowers and the lenders were acting consistently with a mutual assent in respect of an obligation of repayment arising contemporaneously with the agreement to or fact of advancement of the money. As a result, we consider that the primary judge’s rejection of the taxpayers’ case that the written loan agreements were genuine and that all of the moneys had been advanced under and in accordance with those loan agreements (including the moneys advanced before the agreements were executed because conditions precedent had been waived or were redundant or the drafting was sloppy), necessarily meant that only one outcome was open – the taxpayers had not discharged their onus of proof that the assessments were excessive because they had not proved the moneys advanced were loans: Millar v Commissioner of Taxation [2016] FCAFC 94; (2016) 2016 ATC 20-578. The only outcome open was for those appeals to be dismissed.
In respect of the remaining submissions made for the taxpayers relevant to the first and second issues, we do not agree that it is material that the Commissioner did not cross-examine Mr Townsing about his motivations for disguising non-arm’s length transactions as arm’s length transactions in respect of any loans. This submission misses the point. Mr Townsing’s evidence was he had no such motivation and did not disguise anything. It is this evidence which precluded the issue from being explored. Yet the primary judge found that Mr Townsing did have such an intent. It is this which gives rise to a kind of unfairness which requires appellate intervention.
We also do not agree that the Tribunal’s decision can stand. Although it is true that the notice of appeal from the Tribunal does not articulate a question of law, it does cross-refer to the notices of appeal in the other proceedings and they raise questions of law. While not a desirable way to proceed, there cannot be any real issue that, if the principal judgment falls, the Tribunal’s decision which manifestly depends on the principal judgment, must also be set aside.
These conclusions cover many of the Commissioner’s appeal grounds and submissions and make others redundant. To the extent necessary to say so, it follows from the above that we would accept appeal grounds 1a, 1b, and 1c. Appeal grounds 1d (finding amounted to speculation), 1e (inadequate reasons), 1f (the parol evidence rule), 1g (another way of putting the “not open” to find argument, but less felicitous than 1a), and 1h (loan agreements were shams) add nothing and need not detain us.
Appeal ground 2 (impermissible placing of the onus on the Commissioner) also adds nothing. It seems to be yet another way of making the same complaint, albeit in the face of the primary judge’s manifest understanding that the taxpayers bore the onus.
Appeal ground 4 is unsustainable. The taxpayers did not have to call Mr Gould to succeed. The primary judge’s error did not relate to any failure to apply the principle in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298.
The error of the primary judge did not turn on the distinction between fiscal and financial intention as discussed in Richard Walter Pty Ltd v Commissioner of Taxation [1996] FCA 454; (1996) 67 FCR 243 and Raftland Pty Ltd v Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516. Appeal ground 5 is thus immaterial.
Nor was the primary judge’s error one of giving too much weight to Mr Townsing’s subjective intention, and thus appeal ground 6 is without merit.
Appeal ground 7, that the primary judge failed to have regard to the evidence as a whole, is persuasive, for the reasons we have given above.
Appeal grounds 8 and 9 are ways of trying to put the main point discussed above, but add nothing.
The complaint of inadequate reasons in appeal ground 10 is without substance.
Appeal ground 11 relates to the repayments issue dealt with below.
Appeal grounds 12 and 13 relate to the same issue, of failure to consider the evidence as a whole, as appeal ground 7 but for a different loan. The ground is persuasive for the reasons given.
Appeal ground 14 relates to the Cyclopharm shares dealt with below.
Appeal ground 15 is the same as appeal ground 7, that the primary judge failed to have regard to the evidence as a whole for yet another loan, and is persuasive, for the reasons we have given above.
Appeal ground 16 adds nothing.
Appeal ground 17 is the same as appeal ground 7, that the primary judge failed to have regard to the evidence as a whole for yet another loan, and is persuasive, for the reasons we have given above.
Appeal ground 18, which relates to the finding about the Normandy UK accounts not being current at [114(17)] has been addressed above. If that were all the appeal involved it would not succeed because the finding is an intermediate finding of fact which was not necessarily unreasonable. As discussed above, however, we consider it indicative of the error we have found.
Appeal ground 19, asserting inconsistency between [113] and [115] of the primary judge’s reasons is unhelpful and adds nothing.
Appeal ground 20, that this Court should substitute its own opinion, has been dealt with above. As discussed, it seems to us that this is not a matter in which the appeal should be allowed and the case remitted for determination. This is because, on a rehearing, we do not see how a different result could be reached for the reasons given above. Nor do we see that further evidence can cure the problem. Rather, the only way in which the taxpayers might succeed is if the taxpayers, on the rehearing, ran an entirely different case from that which they advanced before his Honour (for example, that a loan agreement had been created by conduct). Such a course, however, is unattractive for obvious reasons.
Given, however, that we have not heard from the taxpayers in circumstances where they have had the benefit of our reasons, we propose to defer making orders for the dismissal of the appeals to the primary judge (and application to the Tribunal) so that the parties may be heard further about these issues.
Appeal ground 21, relating to costs if the appeal is dismissed, does not arise.
Before we move to the remaining issues, a further observation should be made. As we have noted, the primary judge was swamped with a welter of paper by both parties, yet the point that mattered most, that it was not open to the primary judge to find in accordance with the alternative case was not made as clearly, forcefully and cogently as might have been hoped despite the pressure of the circumstances. It should be apparent from the discussion above that in these appeals also the prolixity of the notices of appeal and the resulting submissions, particularly those of the Commissioner, does not assist an appellate court in discharging its functions. Serving up every possible appeal ground, overlapping, inconsistent and redundant, is not a helpful way to proceed and should be discouraged.
We turn now to the one loan agreement not said to have been created by entry into a written document, that from Normandy Asia to Normandy Australia.
The third and fourth (Normandy Asia and Normandy Australia) issues
The primary judge dealt with the arrangements between Normandy Asia to Normandy Australia at [79]–[96].
The first point we consider it necessary to make is that, although not put by the Commissioner, we find it impossible to conclude that the primary judge’s findings about these arrangements were not influenced by his findings about the other arrangements which we have found involved error. If necessary, we would give the taxpayers an opportunity to be heard about this aspect of the appeal.
However, it is not necessary to rely on this consideration to find that the primary judge’s conclusions about the dealings between Normandy Asia and Normandy Australia were affected by error.
First, the primary judge said that the Commissioner had conceded that Normandy Australia had repaid moneys advanced to it by Normandy Asia by way of loan in the sum of $500,000 (at [85]). The Commissioner made no such concession. The Commissioner also always contended that there were no loans and thus the primary judge’s observation at [85] that:
the Commissioner did not contend that any of these payments from Normandy Australia to Normandy Asia did not occur, nor that they were not repayments of payments by Normandy Asia to Normandy Australia by way of loan, but were something else…
also is unsustainable.
Second, the primary judge said this at [86]:
It was never put to Mr Townsing that Normandy Australia never intended, at the time each payment was made to it by Normandy Asia, to repay the payment. Having regard to the transcript of Mr Townsing’s cross-examination at T 825/10 to T 826/5, I reject the Commissioner’s submission to the contrary. The reference to “any of these loans” at T 826/5 is clearly limited to the loans to Pilmora and Advant. Normandy Australia is not mentioned in any part of the transcript that proximately precedes that reference.
We are unable to agree. Leaving aside the true meaning of the references preceding that identified part of the transcript, on a fair reading of the cross-examination of Mr Townsing, it is apparent that the Commissioner’s case was there was no loan from Normandy Asia to Normandy Australia and thus, necessarily, that there was no obligation of repayment. It is true that Mr Townsing denied that there was no loan and insisted there was an obligation of repayment, but it was not open to the primary judge to resolve the case on the basis that it was not put to Mr Townsing at all.
Third, we are unable to agree that any of the twelve matters which the Commissioner put to the primary judge as supporting a finding that the advances were not loans was irrelevant. This is because all of the evidence must be weighed to determine whether the inference should be drawn that the advances were by way of loans. Yet the primary judge rejected a number of those matters at [91] as irrelevant to the issue to be resolved. While a factor may be rejected as such if it cannot rationally bear on the fact in issue, the matters on which the Commissioner relied may not have been weighty, but were not irrelevant.
To this extent, appeal grounds 11, 12 and 13 are persuasive insofar as they deal with the arrangements between Normandy Asia and Normandy Australia.
Otherwise, the primary judge dealt with the Cyclopharm shares at [82] and [92]–[95]. As explained at [82]:
in the year ended 31 December 2007, Normandy Asia provided Normandy Australia with vendor finance, in the form of allowing the purchase price of shares in Cyclopharm Ltd, an Australian public company, purchased by Normandy Australia from Normandy Asia, to remain outstanding. The Commissioner has included the amount outstanding in the sum of $2,220,000 as assessable income of Normandy Australia for the year ended 31 December 2007.
At [95] the primary judge rejected the Commissioner’s case that the shares were transferred for no consideration and not subject to any repayment obligation saying he did so:
for reasons similar to those given in [86] above. I find that the obligation of Normandy Australia to pay the purchase price of the [Cyclopharm (CYC)] shares to Normandy Asia was a genuine obligation because both parties, through Mr Townsing as the directing mind and will of both companies, intended the transfer of the CYC shares to give rise to an obligation of payment by Normandy Australia to Normandy Asia and a right to payment in Normandy Asia from Normandy Australia. That was Mr Townsing’s evidence, and it was never put to him that this was not the case. As to the second ground, additionally there is no evidence to support such a conclusion. For these reasons, the amount of $2,220,000 is not income of Normandy Australia for the year ended 31 December 2007.
Again, however, we are unable to agree that it was not put to Mr Townsing that the loan was not genuine and involved no obligation of repayment. Further, because we consider the reasoning in [86] to involve the errors identified it is not possible to conclude that the primary judge’s reasons with respect to this issue, which cross-refer to those reasons, are unaffected by error.
To this extent, appeal ground 14 is persuasive.
We accept, however, that it would have been open to the primary judge, on the case which the taxpayers ran, to conclude that the taxpayers had discharged their burden of proof with respect to the dealings between Normandy Asia and Normandy Australia involving loans. We consider that this aspect of the appeal must be remitted for further hearing and cannot be dealt with as part of the appeal. However, given that we have also decided that we should hear the taxpayers in respect of our view that there is nothing to remit in respect of the five written loan agreements, we propose also to hear from the parties about this aspect of the matter.
The fifth (the repayments) issue
Despite generating a mass of paper (91 pages which the Commissioner would have relied upon had he been given the opportunity to do so) and taking up considerable time at the hearing of the appeals, this complaint deserves little attention.
The circumstances are these. The fact that the primary judge said during closing submissions that he did not understand Ms Glover’s evidence and asked for the information about alleged repayments to be presented clearly does not mean that, when the primary judge was given that information in a tabular form in submissions in reply by the taxpayers after the hearing and pursuant to leave, the Commissioner was thereby denied procedural fairness. Whether or not the primary judge understood Ms Glover’s evidence, it cannot be gainsaid that all the submissions in reply did, insofar as relevant to this aspect of the appeals, was exclude some payments which Ms Glover had asserted to be repayments, provided cross-references to the material already in evidence in support, and made a short argumentative proposition that the payments should be inferred to be repayments of loans. This short argumentative proposition, however, was nothing new. The taxpayers had always asserted that all of the payments which Ms Glover identified in her affidavit were loan repayments.
This aspect of the appeals is one where the Commissioner is bound by the conduct of the case before the primary judge. If the primary judge did not understand Ms Glover’s evidence, then senior counsel could have asked questions about it. Further, senior counsel could have informed the primary judge at the time his Honour was making directions for the parties to make further submissions (including the taxpayers’ reply submissions as a whole because time allocated for the hearing had run out) that the Commissioner would need to see the information the primary judge was requesting about repayments and wished to reserve a right to deal with that information. The primary judge could then have dealt with the issue at the appropriate time. Instead, the Commissioner said nothing, the reply submissions were filed (as were further submissions for the Commissioner) and then, without leave, the Commissioner sought from the primary judge a further opportunity to make yet more submissions about the repayments. The reality, however, is that there was nothing new in the reply submissions about repayments. All that had been done was to represent Ms Glover’s evidence, reduced in scope, to a tabular form with the short statement that it should be inferred that the movement of money was a repayment of a loan.
The primary judge did not deny the Commissioner procedural fairness by refusing to allow the Commissioner to file yet more submissions in this regard. Accordingly, appeal ground 11, to this extent at least, must be rejected. What ultimately happens to the 91 pages of further submissions about repayments on which the Commissioner wishes to rely, however, may depend on the outcome of our further consideration of the orders consequential on our findings to do with remittal, or not, of any part of the matter for further hearing.
Costs
We can see no reason why the Commissioner ought not to have the costs of the appeal, and consider the costs orders below must be set aside. However, we will also hear the parties further on costs in the circumstances.
I certify that the preceding one hundred and fifty-two (152) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Jagot and Davies. Associate:
Dated: 16 December 2016
SCHEDULE OF PARTIES
NSD 145 of 2016
NSD 146 of 2016Respondents
Fourth Respondent:
HENRY GEORGE TOWNSING
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